SEC Proposes Rules Implementing Dodd-Frank Act Provisions


On November 19, 2010, the SEC proposed rules to implement certain provisions of Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). Among other provisions, Title IV eliminates the private adviser exemption from the Investment Advisers Act of 1940 (the Advisers Act) and increases the statutory threshold for SEC registration.

SEC registration of private fund advisers:
Previously under the Advisers Act, advisers to private funds were exempt from registration with the SEC if, among other things, the adviser had fewer than 15 clients. Because a private fund is considered the client, and not the underlying investors, most advisers to private funds were able to avoid registration with the SEC. The Act removed that exemption, thereby subjecting many private fund advisers to SEC registration.

The proposed rules, however, provide certain exemptions from registration, including but not limited to:

  • Advisers to venture capital funds
    • Only if they manage solely venture capital funds
    • The Dodd-Frank Act called upon the SEC to provide a clear definition of "venture capital fund"
  • Advisers to private funds with AUM less than $150 million, if they manage solely these funds
  • Foreign private advisers
  • Family offices
Although exempt from the registration requirements, advisers to venture capital funds and private funds under $150 million are now subject to SEC recordkeeping requirements and inspection of their books and records. As part of these obligations, these exempt reporting advisers will be required to file a limited Form ADV. The SEC will provide instruction to the adviser on which items to complete.

Registration Eligibility:
The SEC proposed rules that prohibit mid-sized advisers – those advisers with assets under management between $25 million and $100 million – from registering with the SEC, except in instances where:

  • The adviser is not required to register with a state securities regulator;
  • The adviser would be required to register in 15 or more states; or
  • The adviser is registered in a state that does not conduct examinations.
This last exception is the result of the Dodd-Frank Act requirement (see section 410) that mid-sized advisers registered with a state securities commissioner must be subject to examination. The SEC will compile a list of states where advisers are not subject to examination – and thus, eligible for SEC registration – and incorporate that list into IARD. The list will also be available at

Form ADV will be updated to reflect these changes.

The proposed rule also outlines a transition plan for those advisers who are no longer eligible for SEC registration. The SEC proposes a 90-day transition period after July 21, 2011, the effective date of Title IV. All advisers registered with the SEC on July 21, 2011, must file an amendment to its Form ADV by August 20, 2011, declaring, among other things, whether it remains eligible for registration with the SEC. Those advisers no longer eligible for SEC registration have until October 19, 2011 to withdraw.

Changes to Form ADV:
The SEC proposed amendments to Form ADV that are specifically designed to provide the SEC with information necessary to prepare for and efficiently conduct examinations. First, the amendments expand the information advisers must provide regarding the private funds they advise. Second, the amendments refine or expand existing questions that require an adviser to provide their advisory business information. The proposal also requires advisers to provide additional information about their non-advisory activities and industry affiliations.

Advisers should also note a change to Part 1A. Currently advisers must include contact information for the person designated to field questions about Form ADV. The proposal would instead require an adviser to include the contact information for its Chief Compliance Officer, though this information would not be available to the public.

Considering the recent amendments to Form ADV Part 2, these changes duplicate some information; however, this is not entirely surprising. The check-the-box format of Part 1 allows the SEC to query information, which is not possible under the narrative format of Part 2 disclosures.

Amendments to Pay-to-Play:
Finally, the SEC proposed an adjustment to the Pay-to-Play Rule. Originally, this rule prohibited advisers from paying third-parties to solicit government clients unless the solicitor was a regulated investment adviser or broker dealer. The proposed amendment instead permits an adviser to only pay “regulated municipal advisers” to solicit government clients. These “regulated municipal advisers” must be registered under the section 15B of the Securities Exchange Act of 1934 and subject to pay-to-play rules adopted by the Municipal Securities Rulemaking Board.

Advisers engaging third-parties to solicit government clients should ensure their solicitation agreements include a requirement for the solicitor to be properly registered under Section 15B of the '34 Act. Additionally, advisers should consider confirming the solicitor's proper registration in connection with the adviser's routine due diligence reviews performed on the solicitor.

The amendment aligns the SEC Pay-to-Play Rule with the Dodd-Frank Act, which created the new category of "municipal advisers." These "municipal advisers" are defined to include individuals who solicit municipal entities. Such persons include registered investment advisers seeking business from a municipal entity on behalf of an investment adviser.

In addition, the SEC proposed expanding the Pay-to-Play Rule so that it applies to foreign private advisers and exempt reporting advisers. This amendment became necessary after the Dodd-Frank Act eliminated the private adviser exemption from the Advisers Act.

Those interested in commenting on the rules should note that comments are due by
January 24, 2011.








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